Employment Status - Is there a Silver Bullet? - Part 1

In the first of two articles on employment status, Justine Riccomini examines the current activity taking place in this area.

Background

The Department for Business, Industry and industrial Strategy (BEIS) issued four consultation documents recently, in conjunction with HM Treasury and HMRC, as part of the Government’s reaction to the Taylor report, which was published in July 2017 and examined the issue of the “gig” economy and workers’ rights. The consultations cover:

• employment status
• increasing transparency in the labour market
• agency workers, and
• enforcement of employment rights

ICAS intends to respond to one of the consultation documents - the employment status consultation - as this directly relates to decisions employers must make, and which have a direct impact on taxation. The other three consultations are all employment law based. If you wish to contribute to the employment status consultation, please send your comments prior to 8 May 2018.

Although the Taylor report’s remit did not include employment taxes (or self-employed taxes), the two concepts of employment law and employment tax cannot sensibly be examined discretely. The Office of Tax Simplification (OTS) undertook an employment status review, published in March 2015, which looked closely at the tax side of the question. If read together with the Taylor report, a more holistic picture is provided.

What’s happening out there?

The ONS said in its recent report that 15.1% of the total workforce are now self-employed, accounting for 4.8 million people in 2017, compared with 3.3 million in 2001. This and other reports make it clear that underlying trends in working preferences are changing.
Employment status has no basis in legislation – you won’t find a section in Butterworth’s or CCH handbooks setting out how to determine whether someone is employed or self-employed. Instead, taxpayers and professional advisers have had to rely on something altogether more convoluted – case law and precedent. And herein lies the problem, as two cases which appear to contain very similar fact patterns can have very different outcomes.

Employed or self-employed – for tax or for employment law purposes?

Part of the purpose of the employment status consultation is to seek clarification on whether it is fair to consider a statutory test for determining employment status. Another consideration is whether employment law and employment tax law should be considered separately as is the case at present, or whether some form of a merger should take place.

This latter consideration seems to me to be sensible, because to have a tax result which is at odds with an employment law result is surely a recipe for difficulties, adding to the opaqueness and complication surrounding this area.

Are some employment status tests more relevant than others?

The consultations aim to determine whether some of the employment status tests are more important than others – for example, comparing whether someone needs to use their own materials or equipment to be self-employed, or whether the levels of supervision, direction and control over a contractor point towards employment. In Christa Ackroyd Media (CAM) Ltd v Revenue & Customs the judge made specific reference to the length of the contract [7 years], stating that: "In our view a hypothetical contract of that length for at least 225 days per year and terminable only for a material breach points towards a contract of employment".

However, the judge did not consider that paying fees monthly, in the same way, an employee could expect to be paid, or the absence of sick pay, holiday pay or pension entitlement was “significant” in the context of this case, thus attributing less importance to certain aspects of the arrangement.

Employers want simplicity, straight-forward answers and a solution which saves time and money

ICAS members tell us that currently, the expectation placed upon an employer to make employment status decisions each and every time it engages someone can be unrealistic, especially in a large business procurement scenario.

Should employers have to make decisions about something upon which there is little legislation to base a decision? Should engagers also be employment law experts to analyse case outcomes and decide which set of criteria to apply to its own situation?

Many SME employers have never really come to terms with what a “worker” actually is (apart from that described by the Oxford dictionary definition) and contracting parties often incorrectly assume that employment status for tax is a matter of choice. The Taylor report suggested keeping the three statuses and changing the title “worker” to “dependent contractor” although, personally, I am not sure if this is better or worse!

Unsurprisingly, many employers are often more worried about the outcome of an employment tribunal, than an employment tax issue due to the level of publicity around the size of settlements payable, should an employer lose. The recent flurry of large-scale tribunal cases such as Uber and Deliveroo has compounded this fear.

However, their main worry should probably be the potential accrual of retrospective employment taxes and NMW challenges, interest, penalties and reputational damage where people are deemed to be workers, which can prove expensive.

Aligning Income Tax and NICs

The temptation to recruit someone to carry out a piece of work or an ongoing contract in such a way as to avoid employment-related charges such as employers' National Insurance will be unlikely to disappear if there is a difference in the taxes paid by being employed and self-employed. Conversely, the Government should bear in mind that not everyone incorporates for reasons of tax avoidance – there is often more to it than that.

Attempts to introduce an income tax and NICs alignment in the Spring 2017 Budget as recommended by the two OTS 2016 reviews were removed a week later after strong opposition and accusations of it being outside the manifesto pledges. Nevertheless, ruling out NICs changes will be likely to thwart the Government’s efforts to reconcile employment status.